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Offshore Companies

Expat Briefing Editorial Team
18 January, 2016


The term "offshore" when used to describe a country or territory with very low rates of tax has come to be used almost pejoratively these days. However, in the vast majority of countries, the use of "offshore" companies and bank accounts is not illegal, as long as any disclosure requirements that might be in place are met. Indeed, offshore companies may be very useful to expats and globe-trotting professionals, and figures show offshore incorporations have been rising in many jurisdictions.


International Companies and Their Uses

International or offshore companies can be used by a variety of people to achieve a number of aims. Expatriates who have become non-resident in their home jurisdictions, or who expect imminent departure for a job or retirement elsewhere, can legitimately use offshore companies to shelter income from high levels of taxation; and offshore trusts remain one of the best ways to minimize cross-generational inheritance taxation, as well as offering asset protection for professionals against liability suits.

While offshore locations continue to offer solutions for the management of private wealth, a major growth sector in recent years has been on the corporate side. There are numberless ways in which offshore locations can offer tax-efficiency to corporates: holding companies for dividend flows; onshore or offshore listing structures; special purpose vehicles; IP management and licensing; international treasury management; real estate ownership and rental.

The following may be of especial interest if you are providing a personal service (for example in the finance or engineering industry), or if you have a substantial investment portfolio:

  • Holding Company: This can be used to hold investment portfolios, and is useful in providing enhanced privacy. It can be particularly useful in some offshore jurisdictions if you want to become locally resident, and need not to receive income yourself, although you may have a problem with ownership restrictions on residents. If the income of a holding company is used to make further investments, it may be that you won't be taxed on it even when you return to a high-tax domicile.
  • Personal Service Company: If you are engaged in providing a personal or professional service, you may be able to achieve considerable tax savings, as you can contract to supply the service regardless of residence, and the fees earned can accumulate offshore while you work for a low salary in the country where you are taxed. It only works in some countries, and you may have to do something more complicated than just owning the company yourself, if it is not to be 'looked through' by the taxman.


Forming An Offshore Company

Given their historical and ongoing constitutional links to the United Kingdom, the legal frameworks in many offshore financial centres are based on common law, and company laws are also inspired by English law in many cases. However, there are many differences in the legal systems of OFCs, and most are continually updating their legislation to keep pace with the demands of investors and the finance industry in general.

Nevertheless, you can expect to find the traditional company formats in most territories, including private and public companies limited by shares or by guarantee. Many jurisdictions also cater for partnerships of various types, while some are augmenting their company laws with new forms like special purpose vehicles, and protected cell companies. The trust is, of course, an ever-present in common law jurisdictions, and a few have recently introduced the foundation company form, which is essentially the civil law equivalent of a common law trust.

Company formation procedures are generally a lot simpler and faster than a few years ago thanks to electronic registration systems which have cut down on the amount of paperwork needed. The time taken for a new company to be approved may vary depending on the jurisdiction, but 24 hours or less is not uncommon these days.

Usually, an offshore company will be formed by a corporate services provider based in the relevant jurisdiction, who will take care of much of the actual hands-on administrative tasks needed to the incorporate process. In order to provide an idea of what might be required to form an offshore company, we provide a summary below of incorporating a company in the BVI, the most popular offshore company domicile:

Registered Agents: the BVI Business Companies Act requires every BVI business company to have a registered agent and an application to the Registry to incorporate a BVI business company may only be made by the person who will be the first registered agent of the company.

Names: A suitable company name must be chosen. The Business Companies Act contains a number of restrictions on the names that may be used by a company, whether on incorporation or continuation, or when a company changes its name.

Registered Office: Every company must have a registered office. The registered office is where documents may be legally served on the company. The registered office must be a real physical address in the BVI and a post box is not sufficient. 

Memorandum of Articles: Every company must have a memorandum and articles of association that complies with the Act. The memorandum and articles are the equivalent of a company's constitution. The matters covered by the memorandum and articles include the company's internal governance procedures and the relationship between its members.

Shareholders and Directors: Every company limited by shares must have at least one shareholder and at least one director, who may be the same person. Although it is not essential to decide who the shareholders and directors will be before a company is incorporated, a company cannot commence its operations until at least one director has been appointed and at least one share has been issued. Directors are responsible ensuring that the company maintains proper company records.

Most offshore jurisdictions have low or no taxes, but they make up for this by charging initial registration and ongoing annual registration fees. While offshore jurisdictions are generally in competition with each other for international business, these fees can still be quite high in some locations, and they have generally speaking been on the rise as governments seek to make up for shortfalls in other tax revenues.


Choosing Your Jurisdiction

There are several factors to consider when choosing an offshore jurisdiction from which to bank, invest, or trade as an expatriate. The following are areas that you will need to look at in order to make a considered and profitable decision:

  • Political and economic stability. This is a basic, but important concern.
  • Legislature. The situation with regard to banking secrecy, for example, is undergoing changes at present, and it is worth keeping abreast of any issues which may impact on your investment, before, during, and after expatriation.
  • Professional infrastructure. This will need to be up to a good standard, in order for you to receive the support and services that you require, so you will need to check the banking, professional and advisory services available, whether the jurisdiction is well equipped to deal with the particular offshore structure that you wish to set up, and the general standard of the business infrastructure in the jurisdiction.
  • Communications network. This is an obvious concern, but needs addressing. As an expat, you will presumably not be resident in the offshore jurisdiction itself, and may be moving around on a regular basis. You therefore need to check that effective communication between yourself and your advisor, bank, or custodian will always be possible (and preferably that you all speak the same language with at least a reasonable degree of proficiency!)
  • Geographical location. This needs looking at carefully, as it is of especial concern to expatriates. Assuming that your expatriation is of fixed duration, you do not want to have to move your money from jurisdiction to jurisdiction as you move around, or repatriate. The idea of investing it offshore is that it is safe, and easily accessible from anywhere in the world, in keeping with your global lifestyle. It is therefore important that you consider the time zone in which your offshore structure is based. For example, an expatriate based in Australia would find a relationship with a Hong Kong bank very easy to maintain, but an offshore structure established in Jersey or Ireland virtually inaccessible, during normal business hours at least. Online banking makes this a little less of a concern, but it still needs to be looked at.


Offshore Incorporations Recovering

Offshore jurisdictions certainly weren't immune from the effects of the global financial crisis. Indeed, with these small economies' more dependent than most on the health of the finance industry, some saw an alarming contraction in certain core businesses areas, such as company formation.

However, despite ongoing global uncertainty, and the developed countries' efforts to curb the use of "tax havens," offshore incorporation rates in many jurisdictions has recovered strongly and are continuing to grow. According to Appleby's latest On the Register report, which tracks trends in company formations in offshore financial centres, shows that new company incorporations rose in six of the eight key offshore jurisdictions in 2014, with increases of up to 20 percent witnessed.

"There are 672,500 companies now registered across the offshore jurisdictions in which we operate, some 45,000 more than there were five years ago in the immediate aftermath of the global recession," said Farah Ballands, Partner and Global Head of Fiduciary & Administration Services at Appleby. "Most offshore jurisdictions have had a good year, reporting increases to the total number of active companies on their registers of between 1 percent and 4 percent."

In total, there were 93,159 new offshore company incorporations in 2014, slightly behind the previous year's number. Mauritius was a standout offshore jurisdiction for percentage growth of new companies formed, according to the report. The 2,639 new company incorporations marked a 20 percent rise over the 2,196 recorded in 2013. Close behind were the Cayman Islands, where 11,010 new incorporations in 2014 represented a 17 percent increase over 9,433 one year earlier.

Despite a 5 percent drop-off in new incorporations year-on-year, the BVI continued to dominate offshore new company registration by volume in 2014. With 50,834 new companies registered, the jurisdiction easily maintains its two-fold lead ahead of its nearest comparator, Seychelles, which incorporated over 20,000 companies for the second year running.


Is Offshore Legit?

As mentioned in the introduction, while we can't speak for every single place on earth, it is generally not illegal to form an offshore company, open an offshore bank account, or consume other forms of financial services provided by an offshore-based supplier in most countries. Failing to declare such vehicles to the tax authority in your jurisdiction of residence when required to, is, however, very likely to be illegal. Furthermore, tax rules are apt to change quickly, often without much publicity or notice, so it is vital to keep abreast of new tax developments. Ignorance of the law is not an excuse for non-compliance in the eyes of the taxman.

Some people may still have reservations about using offshore vehicles as part of their overall financial planning strategy due to the reputational damage that offshore territories have sustained over the past few years in response to numerous corporate and individual tax scandals. Indeed, the prevailing attitude, generally supported by the mainstream media, is that offshore jurisdictions are, to quote Somerset Maugham, "sunny places for shady people."

What you are unlikely to read or hear, however, is that the majority, if not all, of the major offshore financial jurisdictions meet or exceed new standards on financial and tax transparency, having put in place stringent anti-money laundering, know your customer, and tax information exchange rules in place.

As Angel Gurria, Director-General of the OECD, observed recently, some of the problems associated with a lack of transparency are in the "big islands" rather than the small islands.


The Bottom Line – Get Advice!

In all almost all circumstances, the process of forming a company offshore would be handled by a corporate service provider, adviser or local law firm - but it also pays to do one's homework, in addition to seeking out the views of a trusted, knowledgeable and independent advisor in this area, especially when it comes to your tax obligations.


Additional Information

For a comprehensive guide to the relative strengths and weaknesses of jurisdictions, and contact details for service providers in each, please click here to visit the jurisdictions guide of our partner site, Lowtax.net.




 

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